A Crack in the Dam

by Larry Levin

After a good opening and a strong early rally, the market slowed at the recent highs. Buyers weren't able to take the market higher but sellers couldn't get anything going either; it was like traders were waiting for something. Were they waiting for the bond auction results from the Treasury? Perhaps so, because when the results were known the market plummeted. The first crack in the dam has been sighted.

There was apprehension in the air because of yesterday's U.K. auction: it was bad. Wednesday in the U.K., a government bond sale of 40-year bonds failed to attract enough bidders to fill the intended offering, which was slated at ?1.75 billion but only attracted ?1.63 billion in bids. That's a rare occurrence, and while there are technical factors involved like the odd maturity, the poor auction caused a selloff in the gilt market.

This was the first failed auction of conventional U.K. government bonds since 1995.

The Treasury sold $24 billion in five-year notes today, and while the auction turned out better than the U.K.'s sale of debt, it was still weaker than yesterday's auction of $40 billion in two-year notes. The problem noted with today's poor results were the lack of foreign investors coming to the table. Indirect bids, which are a proxy for central bank buying, were just 30%. The average for the prior four 5-year auctions was 36%.

Our foreign lenders are worried, and who can blame them? It is often said that Congress spends money like a drunken sailor. But I say no; at least the sailor is spending his OWN MONEY!

The Chinese already own over one trillion dollars in US Treasury bills that are depreciating in value. Moreover, Ben Bernanke promised to devalue them even further with his moronic plan to buy another $1 trillion plus in GSE debt and direct Treasury purchases. Besides, China needs a continent full of new infrastructure, plus social spending for 1.3 billion people. And don't forget the new navy China is planning, with which to police its interests from Africa to the central Pacific Ocean and onto South America. All of this will sop up funds China once used to buy U.S. securities.

The dam has cracked and it's only a matter of time before the flood of IOUs crashes the whole thing down.


Previous Day's Trading Room Results:

Trade Date: 3/25/09

E-Mini S&P Trades*
(before fees and commissions):


1) VA sell @ 9:00am at 815.00 = -1.50*2 (2 lot)

2) Engf buy @ 10:10am at 818.00 = -2.00 (1 lot)

3) OTF sell @ 11:00am at 819.00 = -1.50 (1 lot)

4) 80% sell @ 12:00pm at 815.00 = +2.25 (1 lot)

5) OTF sell @ 2:30pm at 796.50 = -2.00 (1 lot)

6) Algorithm positions (6)...combined Secret's and Algo total...-5.75


Electronic (YM) Mini-Dow:

1) None today



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